Who Should Investors Trust in the Scattered Online Travel Booking Industry?
Ryan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Over the past week, two of the most prominent companies in the online travel booking industry have reported second-quarter financial results. These reports sent one stock soaring 16%, and another plummeting almost 30%. With mixed signals coming from different companies, which perspective of the industry should investors trust?
On July 24, TripAdvisor (NASDAQ: TRIP) reported second-quarter financial results, posting earnings of $0.46 per share, up 24% year over year, and revenue of $246.9 million, up 25% year over year. The results blew away estimates, and in response the stock soared 16% the next day.
On July 25, Expedia (NASDAQ: EXPE) reported second-quarter financial results, reporting earnings of $0.51 a share, down 33% year over year, and revenue of $1.21 billion, up 16% year over year. These disappointing results sent the stock tumbling nearly 30% the next day of trading.
These reports clearly tell different stories, as is apparent through the reaction in their stock prices. With two more titans in the space, Priceline.com (NASDAQ: PCLN) and Orbitz (NYSE: OWW), set to report in the near future, who are investors to trust for an accurate portrayal of the condition of the online travel booking industry?
Why It Matters
It's rare for two companies operating in the same industry to post financial results that are interpreted so differently by investors. However, the reports presented certain similarities. Both companies reported costs and expenses outpacing revenue growth and robust overall booking and traffic statistics.
Ramped-up marketing by the companies to attract consumers accounted for expanding expenses. Year over year, selling and marketing expenses grew 28% for TripAdvisor and 33% for Expedia.
Robust growth in overall booking and traffic statistics from both companies is an encouraging sign for the overall industry, suggesting improving conditions. This trend is reaffirmed by strengthening consumer confidence numbers in the United States and Europe.
China, another key market for TripAdvisor, Expedia, Priceline, and Orbitz, hosts one of the fastest growing travel markets in the world. Even in an environment where consumer confidence is falling, Chinese travel volumes are increasing as a result of increasing Chinese incomes. Based on a recent report released by Euromonitor International, a 15% annual growth rate is anticipated in the number of outbound Chinese travelers between 2012 and 2017.
A Flat Tire For Car Rental Services
If the overall market is healthy, why were Expedia’s numbers so horrid? For one, Expedia is having trouble maintaining its market share of the US market, and ramped up spending in a bid to attract consumers, which ate into margins.
Disappointing results in the company’s Hotwire segment were the primary culprit. Consolidation in the US car rental industry has driven up rental rates, making it difficult for Hotwire to offer cars cheaply. This change is unlikely to be reversed anytime in the near future, as the car rental companies push for higher margins.
Both Orbitz and Priceline also possess exposure to the rental car industry, and should be affected negatively from the consolidation in the market. Car services account for nearly 5% of overall revenue for Expedia, 1% for Priceline, and car services, destination services, and travel insurance account for 13% of overall revenue for Orbitz.
Capitalizing on the News
In an environment where the global market is growing, all companies should prosper, right? No. While Priceline has maintained a dominant market-leading position across the globe, all other competitors have struggled to maintain their slice of the market, especially as Priceline has accelerated its advertising campaigns. The increasing costs of maintaining market share will gradually place more and more pressure on competitors' profits, as Expedia’s quarter demonstrated.
Combined, the market caps of Orbitz, TripAdvisor, and Expedia only account for 40% of Priceline’s, displaying the lead Priceline has over its competitors. The scale and capital Priceline possesses should allow the company to strategically acquire faster-growing competitors in emerging markets and dominate the market in most respects.
TripAdvisor should also prosper in the future, as their service offers a more review based platform, allowing consumers to compare prices. With growth in the travel industry will come growth in traffic on TripAdvisor's websites as well growth in advertising revenue.
The Foolish Bottom Line
The online travel booking industry is sending mixed signals. After TripAdvisor reported a tremendous quarter that sent its stock soaring, Expedia reported one of the worst quarter so far this earnings season, sending shares plummeting.
However, the overall global travel market is strong, and will only strengthen further with improvements in consumer confidence numbers. These conditions position Priceline and TripAdvisor to grow and prosper in the future, providing attractive long-term investment opportunities.
Looking forward, investors should monitor the car rental industry and its effect on the online travel companies. Global consumer confidence statistics can also give you a read on the overall health of the travel industry.
All in all, TripAdvisor’s financial report appears to be the more accurate portrayal of the condition of the global travel market. That thesis should be reaffirmed by a strong report from Priceline in August.
Ryan Guenette has no position in any stocks mentioned. The Motley Fool recommends Priceline.com and TripAdvisor. The Motley Fool owns shares of Priceline.com and TripAdvisor. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!